Case Law Details
Whenever an assessee has indicated any amount, which had been paid either by way of damages or penalty, to be an allowable expenditure under Section 37(1) of the Act, the Assessing Authority is obliged to discover the nature of such amount vis-a-vis two prominent aspects, whether it is compensatory or penal. The Assessing Authority would there upon permit the amount as an allowable deduction that may be discovered to be purely of compensatory nature as payment for damages. However any statutory amount paid by the assessee which is sought to be claimed as an allowable expenditure on account of penalty, in that eventuality, the same shall be disallowed being payment for infraction of law. A situation may arise where an assessee might have to make a composite payment being ‘compensatory’ and ‘penal character’ both. In that situation, the Assessing Authority would, of course, be required to segregate the amount containing two characters. After undertaking this exercise, the amount that is held to be of compensatory nature shall be countenanced as allowable expenditure whereas the other portion of the amount, which is penal in nature, shall be refused to be an allowable expenditure. (Para 19)
We over-rule the judgment in M/s. Baldev Singh Kanwar’s case (supra) which does not decide the controversy in its right perspective.(Para 23)
The amount of Rs. 50,000/- paid by the assessee was on account of damages for breach of contract on its part and not a liability incurred for contravention of any law. In the circumstances aforesaid and the clear legal position enunciated above, the said amount claimed as deduction would thus be an expense incurred for the purposes of the business and could not have been disallowed.(Para 24)
IN THE HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH
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